Coca-Cola Amatil loses its fizz

The share price of Coca-Cola Amatil has fallen 14% as management expects interim earnings before interest and tax (EBIT) to fall 15% due to lower demand and cost pressures in the Australian and Indonesian markets. This is the second time earnings have been revised downwards in the past six months (see Coca-Cola Amatil warns on 2013 profit on 6 Nov 13 (Sell – $12.15)), prompting a restructure of the business (details haven't been announced).

Anyone who has been down the soft drink aisle at Coles or Woolworths recently may have noticed Coke seems to be perpetually on sale. This was reinforced by management which said 'The grocery channel continues to be challenging with aggressive pricing activity which has limited CCA's ability to recover cost increases'. The heavy discounting is crunching Coca-Cola's margins in Australia which accounts for 59% of revenue.

The Indonesian and Papua New Guinea (PNG) division, which accounts for 19% of revenue, is facing its own challenges. Despite volume growth exceeding 10% in Indonesia, a 20% depreciation of the Indonesian Rupiah and increased wage and fuel prices is increasing costs at a greater rate than can be passed on to customers. Indonesia and PNG are expected to contribute little to the company's interim profit.

The share price is down 14% since Coca-Cola Amatil: Result 2013 from 20 Feb 14 (Sell – $11.37) and has fallen 21% since we initially downgraded the company to Sell in Coca-Cola Amatil: Interim result 2013 on 21 Aug 13 (Sell – $12.30). We'll be watching closely to see whether the pressure on margins is a permanent problem but for now the price fall means we're upgrading to HOLD.